Bloomberg/New York


Bond investors helping to underpin a record year for mergers and acquisitions have a message for borrowers with plans to fund another $95bn in deals: you’ll have to pay up.
From Charter Communications’ $55.1bn takeover of Time Warner Cable to Warren Buffett’s $46bn purchase of Kraft Foods Group, investors have already purchased $189bn of bonds backing takeovers this year, according to Barclays. With more bonds on the way to fund deals such as Halliburton Co’s $34.6bn acquisition of Baker Hughes and Pfizer’s $17bn buyout of Hospira, debt buyers are showing signs of indigestion.
Top-ranking companies borrowing to finance takeovers are paying a little more than other investment-grade issuers, whose borrowing costs have spiked to a two-year high. And with the Federal Reserve getting closer to lifting interest rates for the first time in almost a decade, investors are warning the days of ultra-cheap credit backing a booming mergers market are nearing an end.
“There’s been a ton of issuance, with a ton more issuance yet to come - why would anyone want to step out in front of that without being paid adequately?” said Matthew Duch, a money manager in Bethesda, Maryland, at Calvert Investments, which oversees more than $13bn in assets.
At $1.2tn, M&A volume in the US is on track for a record year, according to data compiled by Bloomberg. The acquisitions have been the driving force behind a record pace of issuance, with roughly $95bn more bonds in line to be sold this year to finance M&A transactions, according to Barclays estimates, based on the current pace of deal supply. The additional supply is one reason investors are demanding 1.64 percentage points above benchmark government rates to own investment-grade notes, the highest since July 2013, Bank of America Merrill Lynch index data show.
Investors have been happy to feed the boom, submitting orders for 3.8 times the amount of M&A bonds offered on average, compared with three times for non-M&A deals, Barclays analysts led by Jeffrey Meli wrote in an August 14 note to clients. In return, they’ve demanded a slightly higher average yield.
Borrowers for M&A-related bond sales paid 0.01 percentage point more than other new issues, with some sales commanding higher concessions. To finance part of its purchase of Time Warner Cable, Charter Communications raised $12bn, paying about 0.30 percentage point more for a $4.5bn portion of 10-year notes, according to data compiled by Bloomberg and Bank of America Merill Lynch Indexes. The longest part of the offering, $500mn 30-year debt, sold at almost 1 percentage point more than comparable debt.
“Issuers are being forced to offer more and more concessions,” said Scott Minerd, who oversees $240bn as the global chief investment officer at New York-based Guggenheim Partners. “There is no urgency to run out and buy anything in the credit space.”
That means more expensive funding costs for borrowers including Halliburton and Pfizer, which joined a rush by US companies to buy up rivals in a bid to boost earnings amid a tepid economic recovery.